Enzo Biochem Inc (ENZ) 2015 Q1 法說會逐字稿

Good morning, and welcome to the Enzo Biochem Incorporated first-quarter 2015 operating results conference call.

I will now read the Company's Safe Harbor statement. Except for historical information, the matters discussed in this news release may be considered forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933, as amended, and Section 21-E of the Securities Exchange Act of 1934, as amended. Such statements include declarations regarding the intent, belief, or current expectations of the Company and its management, including those related to cash flow, gross margins, revenues, and expenses, are dependent on a number of factors outside of the control of the Company, including inter alia, the markets for the Company's products and services, cost of goods and services, other expenses, government regulations, litigation, and general business conditions. See risk factors in the Company's Form 10-K for the fiscal year ended July 31, 2014. Investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results. The Company disclaims any obligations to update any forward-looking statement as a result of the developments occurring after the date of this press release.

During this conference call, the Company may refer to EBITDA, a non-GAAP measure. EBITDA is not, and should not be, considered an alternative to net loss, loss from operations, or any other measure for determining operating performance. The Company has provided a reconciliation of the difference to GAAP on its website, www.enzo.com, and in the press release issued last night.

Our speaker today is Barry Weiner, President. (Operator Instructions). I would now like to turn the floor over to your host. Mr. Weiner, the floor is yours.

Thank you very much. Good morning and thank you for joining us. With me today is Jim O'Brien, our Senior Vice President of Finance, and David Goldberg, our Vice President of Corporate Development. Our press release regarding the fiscal year 2015 first-quarter numbers was distributed last night and has been uploaded to our website as well.

Just two months ago. We reported to on the progress of our company, the progress that we have made in fiscal 2014, which ended in July, and particularly in the fourth quarter as we closed out the year. The results were a reflection of our really dedicated and highly aggressive program to transform Enzo into a tightly integrated company focused on achieving our twin strategic goals of, first, producing higher-margin products, especially those in high demand, and in developing and utilizing our proprietary technology to position the Company to address the rapidly changing market needs in the diagnostics marketplace. Ultimately, our objective, of course, is to achieve a significantly greater value for the Corporation.

I'm especially pleased this morning to report that these efforts encompassing heightened efficiency, reducing costs, improving margins, emphasizing more profitable products, and providing greater availability of more molecular diagnostics is yielding results. Our commitment has been to achieve a steady, progressive course. And based on our results for the first quarter of fiscal 2015, it is clear that we are on a positive track. The first quarter's operating results have continued to reflect positive outcomes from the strategic plan we embarked upon to improve and enhance our operational capabilities while at the same time expanding our product line further into the molecular diagnostics marketplace.

Our financial results, which I will discuss shortly, continue favorably. We also continue to synchronize our two operating divisions, Enzo Clinical Labs and Enzo Life Sciences, with the goal of introducing products next year based on our proprietary AmpiProbe nucleic acid amplification and detection platform. We believe that the coordination of the functions of our two operating entities makes Enzo unique in the healthcare field. Few healthcare companies have the core competencies in both the quality of manufacturing molecular products as well as in their complex and demanding use in clinical services.

A key asset has been our versatile ability to take a product idea from conception, move it from the earliest prototypes through the various stages of development, and deal with the issues such as how to get adequately reimbursed for performing such tests based on these technologies. This has been key in our ability to execute on our molecular diagnostic strategy. Moreover, our strengthening financial condition is allowing us to make the necessary investments to develop and protect our extensive key platform technology assets.

Our fiscal first-quarter results showed a strong double-digit improvement at Life Sciences, and a breakeven quarter at the Clinical Laboratory. Additionally, as I will detail shortly, we had record revenues at Labs as we continued our focus on higher-margin testing. At Life Sciences, our continued emphasis on high-value products and systems produced not only an increase in product sales over last year but a 400 basis point margin improvement on those revenues as well.

Our results are demonstrative of an increasing demand for Enzo's services and products amidst reviving customer demand in the global markets. More specifically, we are focusing our efforts in the molecular diagnostics field, which is the fastest-growing sector of the clinical diagnostics market, with a growth rate estimated to be in excess of 10% per year. It is also market that despite increasing demand in proven utility, remains under constant downward pricing pressure from payers. This dichotomy has produced challenges that have caused tension between diagnostic suppliers and their laboratory customers, one where the suppliers are not willing or able to reduce their pricing, despite the reduction in reimbursements that their customers are enduring. It is this setting that is generating the opportunity for Enzo.

A case and point is our AmpiProbe technology, which grew out of a multiyear research and implement program. We recognized the need for a new, proprietary molecular testing platform that would be cost effective, produce at least equivalent performance, if not better, to what is currently in use, and not require new equipment and extensive operator retraining. We believe that with AmpiProbe, which is now undergoing validation for LDT approval and will be submitted for FDA approval, we have a product line that can address this market's rising needs.

Assays developed using this technology should be performed at substantial savings to patients and insurance companies, as well as its lab users. And because these products can allow multiple tests to run from a single clinical specimen, they will increase convenience to the ordering physician and their patients.

AmpiProbe should provide clinical labs with an optionality to improve their margins. Labs can obtain Enzo's cost efficient, high quality reagents produced under tight quality control and validate their own assays on any number of open platforms. Alternatively, they will be able to utilize the reference services of our clinical laboratory. They can refer such tests to us and receive attractive rates, rates that should allow higher marginal return than if they were to run the tests themselves in many cases. Our goal in the development of products and services using this technology is to reduce the price of performing such tests to the level where laboratories can offer these tests whether developing them in-house or utilizing Enzo as a reference laboratory at acceptable profit margins. This would make molecular testing a profit center for many small to medium-size academic and commercial laboratories that now run such tests, many at a loss, or do not run them at all. Nor will its availability be lost on third-party commercial payers who are seeing their costs increase as the proliferation of molecular diagnostic testing expands. These organizations are keenly aware of the importance of molecular diagnostics and the vital clinical and treatment decisions that derive from them. Our approach to the market will allow us to capitalize on the successful development of a range of products based on this technology platform for analyzing an increasing number of diseases, a development that is only possible because of the nature of the coordinated infrastructure which we have.

Our translational diagnostics teams are developing an extensive pipeline of products and services based on the AmpiProbe platform. These include panels for infectious and sexually transmitted diseases that relate to women's health, also general infectious diseases, and those potentially related to cancer. These are both diagnostic and prognostic.

I would like to turn the discussion to our first-quarter financial results. As we reported last night, net revenues for the October 31, 2014 quarter were $24.9 million. This is versus the prior year of $24.1 million. It is up $800,000, or 3%. Service revenues at Clinical Labs were a record $15.8 million versus $14.9 million, up $900,000 or 3% from 2013, and up $400,000 from the fourth quarter of fiscal 2014. The increases reflect both greater testing throughput along with increased molecular and high-volume test volume.

Product and royalty revenues at Life Sciences were $8 million versus $7.7 million last year. This is an increase of $300,000 or 4%. Ex royalty income, which declined 38% because of our reduced licensee sales, Life Sciences logged almost a 15% revenue increase from product revenues.

Overall, gross margins remained unchanged, both from the prior year and sequentially from the fourth fiscal quarter. Clinical Labs gross margins increased to 36%, a 200 basis point improvement sequentially from the fourth fiscal quarter, the result of operational improvements and higher value tests performed. Gross margin for Life Science products, without licensee fee income, was 54%, a 400 basis point improvement over the prior year, and essentially unchanged on a sequential basis from the fourth fiscal quarter.

Operating expenses for the first quarter, which included approximately a $1 million increase in legal spending from a year ago, rose 4%. Despite this, the year-over-year quarterly operating loss was essentially unchanged.

For the first quarter, our pretax loss improved by $400,000, or 10%, to $3.2 million. EBITDA for the first quarter was a loss of $2.6 million versus $1.6 million over the same period in the prior, largely due to the lower royalties and licensing fees and higher legal expenditures.

You can refer to the tables that were attached to last night's press release, which include a reconciliation table of GAAP to non-GAAP net income or loss, and EBITDA to adjusted EBITDA.

Our balance sheet is healthy, reflecting the benefits of stronger operating performance, legal settlements received last year, and, to a lesser extent, investing activities. Cash flow used in operations during the quarter was $2.8 million. This is lower by $500,000 than the prior-year period and reflects the higher legal related payments seen in the income statement. Cash on hand as of October 31, 2014 was $16.6 million, while working capital as of October 31, 2014 was $15.2 million. Our financial position is strong and allows Enzo to continue to invest in growing our business and product development activities towards further expanding our offerings.

Our revolving credit line balance was $3 million. This is lower by $250,000 from the prior year. And this just provides additional low-cost financial flexibility to support our growth initiatives.

As for legal expenses, which increased materially in the quarter, this represents an important investment as we seek to protect and obtain pure value for our intellectual property. As has been abundantly clear, our patent estate has generated significant value for us. Not only do we continue to record royalty income as a result of our IP estate, but this was further exemplified with the Life Technologies jury verdict awarding us over $61 million in direct infringement penalties and interest payments. And this award continues to grow as the court finally looks at the appeal, which has been filed in the last few months.

As expected, the defendant in this case, Life Technologies, has looked at an appeal for which it argued orally before a three panel judge heard last month. We are hopeful that this matter will be resolved in the coming months.

In addition to expenses related to that appeal, discovery and deposition activity in the actions we have brought against a number of defendants in Delaware, a recent Markman hearing have all resulted in the incurrence of the higher legal expenses that you are seeing this quarter. We are hopeful that these cases will move toward trial dates in 2015.

Before I end my remarks, I would like to take the opportunity to add some further comments about our other platform technologies which are being developed at Enzo. We are also are in the process of developing cell-based assays that are going through the same validation processes as AmpiProbe products. These products and associated services may be utilized by pathology labs to identify gene expression patterns in clinical specimens that may indicate the potential of cancer progression in a patient. Our long experience in the development of homogeneous assays that are the foundation of key diagnostics products in use today may lead to the development of more sensitive gene expression tests that can result in a wide range of diagnostic applications.

In addition, we are also utilizing proprietary Enzo technology to increase the menu of products and services available to pathologists as they study various tumor types to allow more definitive identification to be made, thus potentially allowing more targeted therapeutic regimens which hopefully will lead to overall better outcomes for the patients.

Our intellectual property estate, which underscores these technologies, has been built up over a decade of pioneering work. And it is at the heart of a number of products we have developed and are developing over -- in the past years.

I would like to especially reiterate several key points. First, we are continuing to drive Enzo to become an integrated diagnostic and services provider, using our proprietary technology to address the challenging diagnostic reimbursement environment, which is being confronted by all clinical labs in this country today. Second, we are using our novel, potentially disruptive, internally managed platforms, specifically AmpiProbe, as a cornerstone of a key business strategy to meet the challenges of this changing laboratory economic environment.

And, third, we are leveraging our products and services expertise to develop and provide high throughput, high-value, low-cost molecular testing and services. We are providing them to the market in a bifurcated distribution model using our global life sciences and distribution teams and the national reach of our clinical lab to provide products and services to the marketplace.

Our development efforts continue to progress toward validations and toward the key regulatory approvals that will allow us to make product introductions into this area. The aggressive streamlining and refocusing of the Company that took place over the last few years is enabling us to deliver improving results and value.

I would like to turn the call over to questions at this point in time. If you have questions, please submit them -- or submit your name to the operator.

(Operator Instructions). Per Ostlund, Craig-Hallum Capital.

Thanks. Good morning, everybody, and congratulations on the quarter. A few questions here from our end. You continue to see really excellent gross margin improvement as you discussed on the -- in your prepared remarks. Thinking about the lab specifically, I'm wondering if you might be able to kind of further bifurcate the contribution from the operational improvement efforts versus the ongoing shift toward the greater molecular testing. And I guess kind of what I'm getting out there relatedly would be sort of where do you feel you are at on the operational effort? Has the lion's share of the effort been undertaken and the benefit being seen, or is there still kind of more tailwind there ahead? Thanks.

I think we are just at the beginning of the execution of the program to enhance the higher-margin products. We have a number products that we are looking toward approval, which we believe, when integrated into the clinical laboratory, will further drive margin improvement. These are tests which are targeting the molecular marketplace, which I think has been an area that has been of intensive focus at the clinical laboratory. I think you can see the results in this last quarter from that focus. It is starting to take effect. We are very pleased with the performance of the lab this quarter as it moved to this breakeven point. It has been a goal which has been a target of management for the last year and a half as we have realigned our internal structure and as we have refocused much of our testing methodology as we move towards a higher volume of molecular tests. So I think we are just starting to see the benefits and we are optimistic that the future will continue to show that benefit, as well as improve as we begin to introduce more tests that will fit this economic criteria.

Excellent. That kind of dovetails I guess into my next question. So, you talked about having some products on the AmpiProbe side under review with, I presume, New York State at the moment. Can you discuss how many there are there, what the potential number ultimately could be? And then I guess the last bit on that front would be what is sort of the key gating factor to getting the products approved? Is the state maybe a little bit slower than you expected because they are getting a flood of applications? And how much have you had to kind of gate your own investment in development as you kind of balance investment and the legal side?

As I mentioned in my comments, one of the key aspects of the AmpiProbe technology is its ability to run more than one clinical specimen from a -- or actually more than one analyte from a single clinical specimen. That is an attribute which is very important not only to the cost but also to patient treatment.

The real value proposition outside of just getting single tests through the system will be getting these panels through the system because they will have the unique appeal, we believe, to the marketplace. We are in a validation process now for multiple analytes.

And to give you sense, the women's health panel has upwards of 14 or 15 different analytes associated to one given type of specimen. That's a process, and it's a process that we think will be done on a one-off basis over the next year or so. Our goal is to get the women's health panel, or components of it, out within 2015. I can't say whether it will be all 14, or a component thereof, but we will begin to release them as they get approved.

We have -- New York State has become a clearing ground for tests on a national level because New York State approval is accepted in the LDT process by approximately 46 states in the United States. What has happened is the -- as the oversight rules towards all of diagnostics are being reconsidered and reevaluated by the FDA is that there has been an enormous push by product developers to get New York State approval for their tests. I think it is only second to the FDA in terms of the approval process.

So, I believe there has been an issue of overload, perhaps, in the authorization area of the state. But they are working diligently. I mean, this is a new platform, a new technology. There's a lot of issues that need to be reviewed and looked at. We are very confident in what we are doing now. We have been working with the system. It has been externally validated. There is a dialogue that is ongoing with the New York State authorities. So, we are optimistic we will start to see these start to emerge in 2015. I can't give you an exact schedule because it is not in our control, but we think there will be initially products that will be targeting detection of specific infectious disease, such as hepatitis, as well as women's health issues emerging during this time period.

Excellent. Okay. One last really easy question, I think. Do you have any additional kind of line of sight on to when the resolution of that PerkinElmer settlement might take place?

I really do not. That is sitting with the judge right now. And as you know, we settled with PerkinElmer. The issue with the judge is just over the disposition of certain legal fees in the case. Once that is rectified, it will clear out. I really don't know when the judge will address it.

Okay. But it is not reflected in your $16.6 million?

No, it is not.

Okay. Perfect. Thank you very much, guys.

(Operator Instructions). Norman Hale, Stifel.

The Markman hearings, when were they completed?

The Markman hearing was completed, I think, about a month or a month and a half ago.

Okay. All right. And has the judge, has he come out with anything further relative to the hearings, or is everything still just pending?

Everything is pending. At the hearing, the judge gave a verbal target of early December for an attempt to issue resolution of the Markman. We are waiting that. Obviously, it's not in anyone's control but the judge's. So, we are anxiously awaiting that ruling.

Okay. All right. I understand. There's really nothing you guys can do relative to that. And I know you briefly spoke about and referred to the Life Sciences litigation, the pending award from that company. Do you have any kind of a timetable you can present to us relative to that particular subject?

My understanding in whether it will hold not is certainly just my opinion. The guidance we are getting is that it can take three or four months, post oral hearing, to get a judgment in that case. So that could put it somewhere around February.

Okay, February of 2015. Okay. Sounds like a winner.

And back to AmpiProbe, obviously this is a key product for the Company, and you discussed in some detail there. But I guess my question -- and I understand you guys do not have any control over these regulatory authorities that give you the approval. But do you get a feeling from your discussions -- I mean there's ongoing discussions with the regulatory authorities -- do you get a feeling that they are running out of any kind of objections in terms of the quality of the product or any of the factors that would be relevant to giving the authorization decision?

All of these approvals are a process. And in many ways, it is an iterative process of back and forth, question and response. I am not aware of any response that would be a response that would be negative to the ultimate authorization to approve any of these products. I think it's a process. I know this platform has been well tested. It has been utilized by others outside of our company. So we have a high level of confidence in its quality and its faith in performing what it needs to do. So, I really don't -- I'm not aware of anything that would be blocking it at this point in time.

Okay. Yes. Because that is an exciting product, hopefully. Hopefully sometime in 2015, you guys will get the green light and start selling the product. Once you do get the green light, will there be a ramp-up in terms of the manufacturing? I mean, what is the game plan as far as once you have received authorization, the approval, what are the following steps you guys would be taking?

Manufacturing is not an issue. We are a manufacturer of reagents globally, so that is an area of high confidence within our company. The first steps will be to integrate the product into our clinical laboratory for our own internal use. It will be a cost savings variable for us in terms of our own testing program. It will be a margin improvement for our own molecular testing in the areas that we receive approvals for. It will also serve as a validation ground to generate data, which we will ultimately utilize in an FDA submission.

At the same time, we will be providing the reagents and the understanding of this platform to others globally. And we will be doing that through our Life Sciences entity, which has a global selling platform, both electronic and on the ground. And I think that is one of the keys of our unique distribution model, to be able to provide the components, the kits, the reagents, directly to the end users if they wish to incorporate and use them, or to provide the service via the clinical lab at a cost structure that could be highly valuable to labs today which are not doing these types of tests. So we are offering a solution that one could view as having two aspects -- direct supply of products or providing of the services. In either case, the agenda is to provide marginal return to the service entity or the clinical laboratory.

Very good. Okay, that's all I've got. Thank you very much.

At this time there are no further questions. I will now return the call to Barry Weiner for any additional or closing remarks.

Thank you for joining us. It has been an exciting quarter. The year looks like it is shaping up to being a very eventful year. We look forward to reporting to you again in March on the second-quarter performance. Thank you for joining us.

A replay of this broadcast will be available until Friday, December 24, at 12 midnight. You may access this replay by dialing 1-800-585-8367. The pin number is 38814081. This replay is also available over the Internet at www.enzo.com.

This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.